State Farm Mut. Auto. Ins. Co. v. Lee, CV-99-0407-PR.

• Citation: 199 Ariz. 52,13 P.3d 1169
• Decision Date: 08 December 2000
• Docket Number: No. CV-99-0407-PR.,CV-99-0407-PR.
• Parties: STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Petitioner, v. Hon. Kenneth LEE, Judge of the Superior Court of the State of Arizona, in and for the County of Pima, Respondent, James and Phyllis Martin, husband and wife, and Daryl Leonard, a single man, on behalf of themselves and all other similarly situated individuals, Real Parties in Interest.
• Court: Supreme Court of Arizona

13 P.3d 1169

199 Ariz. 52

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Petitioner, v. Hon. Kenneth LEE, Judge of the Superior Court of the State of Arizona, in and for the County of Pima, Respondent, James and Phyllis Martin, husband and wife, and Daryl Leonard, a single man, on behalf of themselves and all other similarly situated individuals, Real Parties in Interest.

No. CV-99-0407-PR.

Supreme Court of Arizona, En Banc.

December 8, 2000.

Bryan Cave, L.L.P. by Lawrence G. Scarborough, Kelly A. O'Connor, Phoenix, and Brown & Bain, by Philip R. Higdon, Tucson, Attorneys for State Farm Mutual Automobile Insurance Co.

Law Offices of John L. Tully, P.C. by John L. Tully, Barbara S. Burstein, Tucson, and Gabroy, Rollman & Bosse, P.C. by John Gabroy, Richard A. Brown, Tucson, and Law Offices of Garry B. Bryant by Garry B. Bryant, Tucson, Attorneys for James and Phyllis Martin, Daryl Leonard, et al.

Geoffrey C. Hazard, Jr., Philadelphia, Amicus Curiae.

American Corporate Counsel Association by Steven M. Lee, President, Arizona Chapter, Phoenix, Susan Hackett, Of Counsel, Arizona Chapter, Washington, D.C., John H. McGuckin, Of Counsel, Arizona Chapter, San Francisco, Christine D. Aguilera, General Counsel, Skymall, Inc., Phoenix, Steven T. Lawrence, Corporate Counsel, Skymall, Inc., Phoenix, Steven J. Twist, Assistant General Counsel, VIAD Corp., Phoenix, David T. Glynn, Division Counsel, SCB Computer Technology, Inc., Scottsdale, Gary E. Montielh, Corporate Counsel, Summit Builders, Phoenix, Mark N. Rogers, General Counsel, Excell Global Services, Inc., Tempe, Lee V. Bakunin, Co-Counsel, Excell Global Services, Inc., Phoenix, Gregory R. Knight, Corporate Counsel, Olympus Hospitality Group, Scottsdale, Deanie J. Reh, General Counsel, AG Communications Systems, Phoenix, James H. Curtin, Associate General Counsel, The FINOVA Group, Scottsdale, David M. Bixby, General Counsel, Banner Health System, Phoenix, Michael J. Denton, Vice President, Honeywell International, Inc., Phoenix, Gary A. Smith, MD Helicopters, Inc., Mesa, Amicus Curiae.

OPINION

FELDMAN, Justice.

¶ 1 This is a bad faith action in which a class of policyholders of State Farm Mutual Automobile Insurance Company sought discovery of files and other documents relating to State Farm's rejection of their underinsured and uninsured motorist claims. State Farm resisted discovery, arguing the documents were protected by the attorney-client privilege. We granted review to consider the applicable standard for determining whether the privilege has been waived in cases in which the mental state of a litigant is at issue. We must also decide whether the court of appeals used the correct legal test for determining the existence of an implied waiver of the attorney-client privilege and, if so, whether the test was properly applied to the facts of this case.¹ See Ariz.R.Civ.App.P. 23. We have jurisdiction pursuant to Arizona Constitution, article VI, section 5(3) and A.R.S. § 12-120.24 (1992).

FACTS AND PROCEDURAL BACKGROUND

¶ 2 In 1995, a class representing approximately 1,000 State Farm insureds (Plaintiffs) was formed to contest State Farm's denial of certain stacking claims. Between 1988 and 1995, State Farm took the position that insureds who had more than one State Farm policy covering their several cars could not apply the uninsured (UM) and underinsured (UIM) motorist coverages of those multiple policies to a single loss. For example: an insured owned two cars, each of which was covered by a separate State Farm policy. While driving car A, the insured was seriously injured in an accident. Because the other driver's insurance was not sufficient to compensate the insured for all of his damages, the insured sought additional compensation from the UIM coverage of the policies covering both car A, which was in the accident, and car B.

¶ 3 State Farm denied requests to stack UIM coverages in this manner based on an anti-stacking provision in its policy form. Plaintiffs allege that State Farm acted unreasonably because its anti-stacking language did not comply with A.R.S. § 20-259.01(H) (Supp.1999) (then numbered § 20-259.01(F)), which allowed automobile liability insurers to prohibit stacking by using certain policy language. This court eventually held that State Farm's policy language did not comply with the statutory conditions permitting insurers to prohibit stacking. See State Farm Mut. Ins. Co. v. Lindsey, 182 Ariz. 329, 332, 897 P.2d 631, 634 (1995). State Farm claimed that until we decided Lindsey, it acted reasonably in interpreting A.R.S. § 20-259.01(H) to allow it to rely on the anti-stacking language in its policy form. Plaintiffs disagree and allege breach of contract, fraud, bad faith, consumer fraud, and unlawful acts in violation of A.R.S. § 13-2301(D) (Supp.1999). We consider the attorney-client privilege only in light of the bad faith and fraud counts.

¶ 4 In Lindsey, we held that State Farm's anti-stacking language was ineffective because it was not sufficiently clear to put policy owners on notice that A.R.S. § 20-259.01(H) was being invoked and that they therefore had a choice of which policy and which limits to apply. 182 Ariz. at 332, 897 P.2d at 634. Plaintiffs contend that even before Lindsey was decided, State Farm knew or should have known that its anti-stacking provision was invalid and that it was therefore acting in bad faith when it denied Plaintiffs' requests to stack. This contention is based in part on a series of pre-Lindsey cases involving the same or similar issues in claims made against State Farm by insureds trying to stack UM or UIM limits.² State Farm countered that prior to Lindsey it reasonably believed its anti-stacking provision complied with the statute and it was therefore not acting in bad faith.

¶ 5 During discovery, State Farm produced numerous documents from claims files in other cases and conceded it had sought and received advice of counsel about whether to pay or reject Plaintiffs' claims. State Farm denied it intended to show good faith by advancing a defense of reliance on advice of counsel and claimed correspondence with counsel relating to denial of stacking claims was protected by the attorney-client privilege. The documents in question evidently fill five privilege logs, covering communications with fifteen law firms. Plaintiffs filed a motion to compel discovery and for an incamera review of the contested documents. They did not agree with State Farm's characterization of its position, arguing that State Farm injected the subjective good faith beliefs and mental state of its claims people as an issue in the case, thus implicitly waiving the privilege.

¶ 6 After a hearing, the trial judge granted Plaintiffs' motion to compel production of the contested documents. Evidently agreeing with Plaintiffs' characterization, the judge stated:

Plaintiff next argues that the attorney-client privilege has been impliedly waived by Defendants based upon a corporate knowledge/advice of counsel defense. If a defendant sets forth a defense that it is not liable because it based its decision on the advice of counsel then it has impliedly waived the attorney-client privilege by placing the advice of counsel at issue. Defendants in this case claim that it has not expressly raised the defense of advice of counsel.

In this case, Defendants have claimed that its managers held a good faith belief in their interpretation that stacking was not permitted under its insurance policies. While not expressly setting forth the advice of counsel defense, the facts in this case demonstrate that the Defendants' position on stacking was made after having its counsel review the applicable statutes and developing cases and advise the corporate decision makers. Thus, the advice of counsel was a part of the basis for Defendants' position that was taken. The advice of counsel defense is impliedly one of the bas[e]s for the defense Defendants maintain in this action. Defendants have, therefore, impliedly waived the attorney-client privilege.

Minute Entry, Jan. 19, 1999, at 4 (emphasis added).

¶ 7 The judge's minute entry, read in light of counsel's previous briefing, shows that he accepted State Farm's avowal that it would not advance an express reliance on advice-of-counsel defense. He concluded further that State Farm would not be relying on the objective reasonableness of the decision to deny stacking. Instead, State Farm was defending Plaintiffs' claim by asserting that its claims managers held a subjective good-faith belief that their decision to deny stacking was reasonable under what they knew about the state of the law as it then existed. See, e.g., State Farm's avowal that it would defend in part "on what its decisionmakers knew, thought and did." See Petition for Review, Appendix 5, at 1. The judge evidently believed that what State Farm knew included advice of counsel because that "was a part of the basis for" the defense. He therefore concluded that State Farm impliedly waived the privilege when it put at issue the subjective legal knowledge of its managers after they sought and received legal advice. As will be explained, we find no abuse of discretion in those findings.

¶ 8 State Farm filed a special action in the court of appeals contesting the trial judge's finding of waiver. The court of appeals held that the "judge misapplied the law" in finding a waiver because "the record shows" State Farm's "defense is that it reasonably believed the policies complied with the [anti-stacking] statute and that this belief was based on the pertinent case law that existed before ... Lindsey." State Farm Mut. Auto. Ins. Co. v. Lee, 197 Ariz. 347, 349, 356 ¶¶ 3, 31, 4 P.3d 402, 404, 411 ¶¶ 3, 31 (App. 1999). State Farm's defense, the court said, "is based on an objective assessment of the case law, the statute, and the policy language." Id. at 356 ¶ 31, 4 P.3d at 411 ¶ 31. As will be seen, we do not agree with the court of...